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When you borrow, borrow big time




In this issue:
» Its Too Big To Fail playing out all over again
» The long commute to work
» The loan waiver that brought the UPA back
» Mark Mobius still likes Indian equities
» ...and more!!

Many years ago, during the height of the cold war, there was a popular theory - mutually assured destruction. If you sink, so will everyone. Others had no choice but to keep you alive. Years later, the theory has mutated to a financial version - Too Big To Fail. We saw it being played out when governments had no choice but to bail out financial institutions during the meltdown. We are seeing that again with the Dubai bailout.

Abu Dhabi, the richest member of the UAE has agreed to bail out neighbouring Dubai. At the last minute. After all, it couldn't let Dubai default without harming its economic interests. Abu Dhabi has provided the Dubai government with US$ 10 bn. That's enough to pay the US$ 4.1 bn due immediately but less than the total debt. As per the New York Times, Dubai World (real estate arm) still owes about US$ 18 bn, Dubai Holding (investment arm) owes US$ 8 bn, the Investment Corporation of Dubai owes US$ 26 bn and the Dubai government itself owes US$ 16.3 bn. What about these remaining creditors? We believe they will also have to show some flexibility while dealing with a sovereign state. Too Big To Fail, you see.

The lesson in all of this - if you decide to borrow, borrow big time. The smaller fry is taken to task, borrowers who are Too Big To Fail are bailed out. Not that it is the right thing to do. We certainly don't believe in it. But it appears that this logic is working. Let's see for how long.

01:02 Chart of the day



Note: Does not include the commute back home.
Source: The Economist

Today's chart of the day highlights a fact that you perhaps know all too well about. As per the Economist, a survey of 11,000 people has revealed that travelling to work is painful enough to consider quitting. The daily commute is especially bad in crowded countries like China and India. In contrast, the North Americans are much better off. These figures are averages. Surely readers from Delhi, Bangalore and of course Mumbai must think the time taken is much higher in India! Besides the inconvenience, the duration of the commute indicates the urgent need for better urban planning in India. All the man hours spent in travelling could better contribute towards pushing the GDP upwards.

01:34

Rs. 60,000 crores is no small number by any stretch of imagination. But it also cannot get bigger than this for the ruling UPA government at the center. It was always being felt that this sum, which was sanctioned by the government in its previous regime for the farm loan waiver scheme, dealt a killer blow to its rivals. And now, even numbers seem to be telling the same story. A newly arrived report shows that states which topped the list in terms of total amount of loans waived off are also the states where the Congress performed admirably in the polls. And the reverse also seems to be true. Congress performed poorly in states where the amount waived off was comparatively lower.

Indeed, some lessons here for the parties trying to topple the Congress. But unfortunately, all the wrong ones. For it is not waiver that will solve the ills facing the Indian farmer. It will only be solved through things like higher productivity, better rural infrastructure and greater financial inclusion. We hope these facts are not lost to the Indian polity who, one feels, has always had the tendency of sacrificing long term solutions for short term gains.

02:22

Templeton Asset Management's chairman Mark Mobius is very clear about how he feels about India and Indian stocks. About India, he feels that India is still a good emerging market and investors should stay the course. He believes that the country will maintain its rate of growth going forward. But he also added that many Indian stocks currently do appear to be rather expensive. However, he continues to make strategic investments in some Indian companies as there are lots of good companies in India. That said, one thing that an investor should always keep in mind is that a good company does not necessarily make a good investment. It is only the combination of a good company along with a good price that makes for a good investment. One of the simplest but most overlooked rules of stock market investing.

02:54

Wholesale Price Index based inflation has climbed to 4.8% for November. That's a ten-month high. The main culprit is the price of food. Cereals, pulses and vegetables - especially the humble potato and onion are witnessing runaway inflation. Of course, much of it is due to the poor monsoons this year. The leaky public distribution system also doesn't help. The policymakers are pinning their hopes on a better winter harvest. In our view, they will have to act sooner rather than later. Not because monetary policy necessarily has much impact on food prices. Instead it is because high food prices have a political fallout. That always gets governments to act.

03:19

Whether they liked it or not, the US taxpayers rescued many of the very financial firms that got the country into the mess of the credit crisis in the first place. Through government bailouts that is. Now that many of them are back on their feet, expectations are running high. In fact, US President Barack Obama has told top US bankers that they owed it to the country to help lift the economy out of crisis. And that they should do this by lending more money to small businesses in need and embracing financial reforms. An important part of that means finding ways to help credit-worthy small to medium-sized businesses by giving the loans they need. What has got Obama worried is that, off late, he has been receiving letters from small firms saying they could not get loans. With the all so important 'trust' factor that has taken a huge beating in the US, the wheels of credit and lending that the US economy moves on seem to have gotten rather rusty.

04:00

It is not just the investors who seem to be happy with the Indian GDP growth in the quarter gone by. Even our FM, Mr Pranab Mukherjee seems to be all smiles. And why not? After all, India's not so comfortable public debt position may not deteriorate any further in the current fiscal. Strong economic performance has given the FM the hope that government revenues are likely to come in more buoyant than expected and hence, India's fiscal deficit, a measure of how much more it spends than earns, is likely to remain within the targeted 6.8% as a percentage of GDP. However, no further deterioration in the deficit situation does not mean that the 6.8% is a good number. Agreed that these were extraordinary times where the government had to come to the rescue but if India has to put itself on a higher growth path and has to lower the cost of borrowing for its companies and citizens, its deficit will have to be reined in substantially.

04:40

Meanwhile, the benchmark indices fell in to the negative territory thereby wiping out the opening gains. The BSE-Sensex was trading lower by 51 points at the time of writing. Selling activity was witnessed in stocks from the banking, PSU, auto and capital goods sectors. Most other Asian markets were also trading in the red at the time of writing.

04:54 Today's investing mantra
"Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally." - Warren Buffett.

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The best way to find yourself is to lose yourself in the service of others.”
Mahatma Gandhi

 
gopalpai

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